Agents and Brokers as Consultants: Conflict of Interest or Value-Added Service?

IRMI Update editor Jack Gibson provides reader responses to the question of
whether insurance agents and brokers should providing consulting services.
Although no consensus is reached, the views expressed are both interesting and
entertaining.

In my June 19, 2001, editorial in IRMI Update #19, I discussed the issue of value-added services
and the debate over an insurance agent or broker also acting as a consultant
because of the conflicts of interest that can arise. Is there a conflict? Can
an agent truly be objective? The reader response was overwhelming and can be
summed up in two words—it depends. Whether a consultant, agent, broker, risk
manager, or insured—past or present—readers appear to agree that the quality
of advice provided by agents and brokers is dependent on the quality of the
agent/broker.

It also depends on the nature of the assignment and the inherent conflicts
of interest that arise. For example, an agent's review and comparison of competing
agents' proposals will be much more circumspect than an agent's advice on what
to include in a construction contract's insurance requirements.

Of course, there are those who believe, rather strongly, that regardless
of the agent/broker's knowledge and commitment, you must be either "fish" or
"fowl" (as one consultant phrased it). These people believe that agents should
stick to their primary duty of procuring insurance and should not offer fee-based
consulting services.

I believe there is a middle road. An insurance buyer should choose an agent
or broker based on his/her professionalism, demonstrated insurance and risk
management knowledge, understanding and knowledge of the insured's industry,
ability to communicate, and the quality of the supporting agency/brokerage infrastructure.
The relationship should be grown and nurtured in the same manner as relationships
with other professional advisers, and advice from agents/brokers should be sought
and considered for many risk and insurance issues.

However, there is also a place for consultants. In particular, they should
be considered whenever there is an obvious conflict of interest, such as a broker
selection process or insurance competitive bidding situation. They should also
be considered when you need a second opinion with regard to a recommendation
made by your agent/broker. And, of course, a consultant can be particularly
helpful when you have a need for specialized expertise, such as setting up a
loss control program, evaluating the best structure and staffing level for a
risk management department, or studying the feasibility of setting up a captive.

But that is enough of my view. The views of nearly 50 readers of IRMI Update
are expressed below. Regardless of where you stand on the issue, these reader
comments are thought-provoking, sometimes contentious, and often entertaining.
With references from the Bible to the movie "Miracle on 34th Street," the opinions
expressed run the gamut. We have slightly edited some of these responses to
improve readability and conserve space. We've tried to categorize the responses
by the role of the commentator, which in some cases required educated guesses.
We apologize to anyone we categorized incorrectly (let us know and we'll correct
the error). In case you are particularly interested in the opinions of one of
these groups, here are links to them:

I began my career during graduate school working as a risk manager (actually
an insurance buyer, back in the early 70s) for physicians. My father had an
independent agency, and I learned a lot from him. He had health problems, so
I took over the agency operations for a while, and moved into full-time sales.
Later, I sold my agency and began consulting and teaching (CIC and CRM), but
I still maintained my better commercial clients. All of that as background to
your questions: "Can an independent agent also provide sound, risk management
advice?" It is possible, with reservations.

Anyone offering advice must be technically sound in their understanding
of risk—its identification, analysis & measurement, control and financing.
Some agents have a good background for this, some, sadly, do not.

In the
identification phase, too many agents rely on identifying only "insurable"
risks, or those risks with which they have become familiar during the insurance
process. There is a much greater picture, and that is the abyss into which
many fall. This area is SO CRITICAL, because if not identified, risks cannot
be analyzed, controlled, or adequately financed.

In the analysis phase, many agents lack the ability to qualitatively
AND quantitatively analyze the risk of the client. It takes mountains of
data, and lots of statistical knowledge to see what is before you.

In the control phase, agents rarely have the expertise to address sophisticated
safety issues.

During the financing evaluations, the alternatives to typical, traditional
guaranteed cost options are rarely understood, therefore are often not explained.

Anyone earning their money selling a product has a hard time recommending
another product.

My favorite movie "Miracle on 34th St." shows a Santa
who directs shoppers away from Macy's to Gimble's for a toy. Management
is furious, shoppers are delighted, and even comment that they will come back to Macy's because the store is so
honest. This is a tough (and often expensive) lesson to learn. Honesty with
the client pays off, at least in the long run. And that takes me to my final
point...

Agents who are financially sound, and don't need the sale to survive
are more likely to direct the client into non-traditional insurance areas
than those who are hungry. That would also apply to those agents who, having
an adequate pot of gold, STILL want more, driven by competitiveness, greed,
fear, or company premium demands.

I have, on several occasions, been successful
in providing both RM services and insurance products to my clients. Unfortunately,
in Tennessee, I must live off only the commission in those cases, but it
increases client confidence, loyalty and trust. And, I ALWAYS tell the client
that I am giving them a service I would charge for, but cannot because of
the state statutes.

Thanks for introducing the topic, I hope to see other viewpoints.

—R. W. "Tommy" Thomas, Cordova, TN

Having had the pleasure of independent consulting for some 33 years, my experience
was that the vast majority of agents strove to provide the best advice and coverage
within the areas of their knowledge, expertise and markets to which they had
access. In a few instances when an agent acted as a consultant, the insurance
companies (not necessarily the competing agents) were leery of providing their
best quotes since some of them had been burned when the client told the agent/consultant
that he could have the business as a commission agent if he could match the
best quote. That aside, the biggest obstacle facing the agent is the ability
to develop the cooperation of all markets which could possibly serve the client.
The direct writers come to mind as possible quality markets of which a typical
agent would have little knowledge let alone rapport. A pure consultant has "the
world as his oyster" when it comes to access to insurance markets. A consultant
should be able to converse with any and all markets (taking into account agent/broker
relationships) and speak with authority on behalf of his client.

—David A. Langner, CPCU, CLU, ARM

It has been my experience there is significant resistance to a broker/agent
making recommendations outside of the normal "insurance" parameters. In fact,
I find most brokers/agents are adverse to the concept of "added value," and
are, sometimes, almost reactionary to it.

This statement is a very broad stroke and likely to not apply to quite a
few of those in the discipline, but most simply do not understand the issue
of providing service to "their" client, other than the general service of issuing
insurance policies and buying lunch.

Intervention by any source for alternative risk transfer, risk prevention,
or risk containment is viewed as interference with "their" client and simply
not welcome. The brokers/agents are unable to perceive alternatives, much less
intervene, to reduce the actual cost of risk and do not have an incentive to
develop the resources to control these issues. On a whole, they are still trying
to compete on price, not the reduction of the cost of risk.

Let me suggest this attitude is directly consequential to the direct competition
model the insurance industry fostered for the past 20 years. In that model each
broker/agent is competing with the others solely on price, and the broker/agent
with the largest volume forces the other out of business. "Ownership" of the
client was the means to control the marketplace; the duty to provide the service
of risk abatement was secondary to the ownership.

The model is changing, but it will take time for the agent/brokers to realize
they cannot allow the insurers to be the guardians of risk transfer.
The insurers are now financial institutions, with shareholders looking for immediate
financial return, and they will use market forces to adjust the premium to meet
their loss, regardless of the potential for cost, and loss, reduction. The broker/agents
must fill the gap of knowledge, acumen, and business sense for their clients.

For all the years that we have known each other, I have been a fee-only consultant
providing risk management services. In my early days in the business, I too
was like the agents you described, trying to provide the best service for the
client at the best possible cost to the client and occasionally providing just
consulting services and not sales. From years of firsthand experience, I can
tell you that an independent-fee-only consultant clearly provides the most comprehensive
and objective view for the client without any of the potential baggage to which
you allude in your comments. Yes, many times recommendations which we have included
in our report have been previously made by an agent and have gone unheeded until
made by the consultant. Many more times, we have made recommendations which
were unheard of by the agents or overlooked as they move to process more business.
Constant continuing professional development from organizations like the CPCU
Society and the Society of Risk Management Consultants assist those of us who
strive to provide the just one more service in this wonderful business.

Although I have been in the "business" for 37 years, it is only the last
9 that I have been a true consultant. I truly believe that you must be "fish"
or "fowl." Years ago, when I was with a national broker, a large sporting goods
chain called and asked if I knew a good consultant. When I offered to be their
consultant, I was told that I couldn't quote on the account. I decided to try
and become their agent and gave up the opportunity to be their consultant. Ten
years later, they had been through numerous insurers and agents, but the consultant
remained the same.

There is an agency in town that has two companies in the same building next
door to each other. One provides consultation and the other is an agent. I know
of two cases where, after using the consultant, the risk management person was
terminated and the agency became agent of record. Speaking with forked tongue?

Consultants have a place. It is working with agents and direct writers to
provide the broadest possible coverage at the lowest price. They can also help
determine proper risk retention levels (instead of insurance) and can help implement
other risk financing alternatives.

It is interesting that this came across my desk today, as I had this same
conversation with a prospective client this morning. I have been a risk management
consultant for well over 15 years. I believe the answer is no.

It appears to me that agents and brokers do in fact give excellent advice,
however, I find that the excellent advice is always related to a policy sale.
If the need is there, and the policy is right (as well as the premium and corresponding
commission), the agent/broker will provide the proper advice. Remember, risk
management by its nature involves attempting to treat risk with a number of
vehicles other than insurance. Unfortunately, most agent/brokers compensation
(whether directly or indirectly) is based off the sale of insurance policies.

This is particularly true when it comes to self-insurance, captive development,
or alternative risk financing arrangements because all involve less insurance.
What agents and brokers don't realize is that the relationship with the client
under a consultative format will sustain itself for a much longer period of
time and will out-produce overall revenue from that client in the long run.

—Raymond A. DiDia, Managing Executive Partner, Source
One LLC

I am a "pure consultant" heading a firm of consultants. Most of us are actuaries.
We have found the work to be different—more intimate as to internal qualities
or failures—and find a great need for advice on a confidential and clearly independent
basis. I have had good experience with agents' advice over the years. Agents
are not used car salesmen. However, there is a certain inherent conflict of
interest in the nature of the position. When I was an insurer underwriting officer
and later CEO, I relied materially on agents' disclosure of risk problems. Both
the client and the insurer cannot get total loyalty. It has seemed to me (appearance!)
that consultants who are employees of brokers have the same positional attitude
and conflict as do the agents themselves, and can be no more independent. I
think good agents are and should be consultants to their clients, which is very
helpful to the client and often the insurer as well—but they should not claim
to be independent consultants, as that isn't possible.

Appearances do matter. Recently we advised a client to switch from self-insured
to fully insured for workers comp. I am not sure they would have accepted the
advice if we were an agency.

—Chap Cook, CPCU, FCAS

Your query is most likely the most dangerous political football in the insurance
industry. It is so politically incorrect to address this subject (agent remuneration
and objectivity toward clients) that I was surprised that you brought up the
topic.

Quickly, the agency commission system is built on a basic conflict of interest.
Generally, the higher the premium, the higher the commission. Any effort to
lower the premium (notwithstanding the coverage issue) is a double whammy. The
agent spends money to make less money. Agents are businesspeople and are motivated
as any other businessperson. Consumers cannot expect an agent to act against
his business interest or perform pro bono work for his clients.

My experience in this subject (26 years as agent and consultant) leads me
to believe that the remuneration is the basis for objectivity.

—Monte Gale, President, National Risk Services, Inc.
Glen Rock, NJ

Early in my career, I worked for a national broker as a risk management consultant.
I thought I could give unbiased, independent advice regarding my company's programs
and those of others. Once, when I recommended my client select a competitor's
program because it was better than my company's, I got in trouble with my company.
Yes, it is possible for an individual working for an agency to render independent,
unbiased opinions, but sometimes the employer of that person does not share
the same definition of "independent" and "unbiased".

I am an independent consultant. But, I also worked 12 years for a national
insurer, 10 years with a national broker and 3 years with a large regional agency.
Much of that time I spent endeavoring to serve a client first and the firms
I worked for second. I feel that there is an unavoidable conflict of interest,
for insurers, agents, and even brokers, when it comes down to the issue of where
to buy insurance and analyze other means of risk transfer.

I agree that there are many agents and brokers who are excellent in consulting
with clients in designing and implementing insurance programs. The problem is
that for many risks, no one agent or broker will have access to all the markets
and resources that are needed. An agent or broker who professes to be a "one-stop
shop," while posing as a counselor to the client, has manifested a conflict
of interest. Most times, the agent or broker is doing this in order to isolate
the client from other providers who he knows may be able to do a better job
on a critical issue.

The real problem is that there are not enough independent consultants.

Your question is one of the ongoing challenges in the risk and insurance
management professions. Over the years, I have been a risk manager, broker,
and now an independent consultant. Your question seems to me to need focusing
on three areas: (1) competency, (2) conflicts, and (3) resources.

I have found that almost all agents/brokers want to do a professional job
and are strongly supportive of their clients. Most brokers who represent clients
seem to want to get along well and often are supportive of my involvement as
an independent consultant. However, given human nature, and my experience as
a broker, I do think it's fair to state that agents/brokers would honestly be
happier without an independent consultant around unless it is to help them retain
their account. The major brokers, who claim to have every type of expertise
known to mankind within their organization, would clearly prefer that independent
consultants not be used.

Regional agents/brokers often lack the internal resources to do certain things,
while the larger brokers (especially in the soft market days) have cut back
on their resources and often promise their clients services (in their proposals,
for example) that they often do not deliver. I find it interesting that some
brokers, usually the smaller ones, will hire the independent consultant to work
with "their" client to provide services for which they are not equipped. This
can lead to conflicts where the consultant discovers problems in the coverages,
risk financing, retention, etc., which the agent/broker should have known about.
Another major problem comes from the insurance companies themselves, who cannot
seem to get a correct policy issued on a timely basis. On major accounts, it
isn't unusual to be waiting for a correct (or corrected or additionally endorsed)
policy for most of the policy year.

As to conflicts of interest, you owe your allegiance to the party that hired
you. Both law and logic support this approach. For example, if an attorney,
representing a client, has information that would assist the other side, they
are ethically and legally obligated to focus their assistance for the benefit
of the client. They are under no obligation to disclose facts that support the
other side and undermine their client's interest. If during your work, you come
upon facts that could be used for or against your client, you are obligated
to use them to assist your client/employer, whether you are the underwriter
working for the insurance company or the independent consultant working for
your client. The difficulty in the insurance industry is that some folks have
more than one employer. Agents and brokers find themselves in a juxtaposition
situation where their employer is both the insurance company and the insured.
That can cause problems for them. An independent consultant can most often avoid
these built-in conflict situation.

In summary, I do believe that most agents and brokers can and do provide
excellent counsel to their clients, but they generally limit their advice to
areas that will not adversely impact their revenue stream unless there is no
option, or perhaps a broker selection is being considered. There are win-win
scenarios for all where independent consultants are involved. The optimum solution
usually produces long-range cost savings for the insured/client, and at the
same time does not drastically impact the agent/broker revenue stream. There
is a need for each and every one of these professions.

Let me first say that since I am an independent consultant, obviously I'm
not unbiased on this issue. However, I do feel I have a unique point of view
since I was a broker first and then a consultant.

There is an old Biblical saying that applies here, "You cannot serve two
masters.…" An agent by definition represents the insurance company. While there
are many agents that have their insureds' interests at heart, they must, in
good conscience, represent the company. The consultant ONLY represents the client.
What is more important, most clients realize this fact and are more trusting
of the consultant than the agent.

The agent is certainly important to the insurance relationship and he and
the consultant working in concert provides the client with the best of all possible
worlds.

In a word, "no." Your comments about your personal past as a consultant are
right on the money. The agent is a licensed vendor of the service provider,
the underwriter. In spite of his best intentions, this relationship precludes
the offering of accurate consultative advice.

In spite of how close the client relationship is to the agent, there remains
an element of "doubt" or "mistrust," as the agent is seen as the seller of product
that generates commission. The consultant avoids being painted with that brush,
and can be successful with helping the client to understand the need to buy
coverages absent from their program. The savvy agent understands this, and rises
above feeling threatened.

I am a full-time consultant, and I see this all the time. For the commercial
insurance buyer, with no in-house risk manager, having the consultant on board
is key. We are like the third leg of a three-legged stool, completely necessary,
and complimentary to the other legs.

—Whit Payne, President, WP Risk, Atlanta

My answer to being an agent and a consultant is "NO."

Before consumers can make a decision with regard to insurance, they must
obtain some knowledge of the product and the coverage it provides.

Where will the knowledge come from?

I believe insurance knowledge is available from lots of sources. Everything
from the Internet, to company handouts, to books and periodicals, to good old
"word of mouth," not to mention the agent or consultant himself. There really
is an abundance of information to be had.

I'm not sure the consumer is willing to put in the time necessary to become
self-educated. Just like the complexities of the policies, the information can
also be overwhelming. Therefore, they usually want a professional to help them.

Would an agent be willing to tell the client everything within each policy?
Would he go over and explain all the terms, conditions, agreements, and exclusions
as well as the coverages provided? If he's not willing to do this, then he is
not acting as a consultant.

Can an agent provide credible and unbiased advice? No.... Agents that act
as consultants are telling the insured, "Buy my product, but then pay me to
find the errors within it".

In New Jersey, producers acting as agents, and earning commissions from their
companies, cannot charge a fee for policy related services. Therefore, the question
is, when does the agent stop being an agent and start to be a consultant?

In order to not be in violation of the NJ Insurance Laws, there must be a
written and signed agreement for consultative services outlining all the work
to be done and the policies involved. I think the insurance buying public would
balk at paying a fee to their agents, knowing that the agent is also obtaining
commissions from the companies. In New Jersey, combining the two types of services
would lead to a legal and administrative nightmare.

Let agents use their time productively in the selling of products, and let
the consultants do the deep analysis of the policies.

Can an agent act in the capacity of consultant and be credible? This has
been a compelling and difficult subject for many of my professional years. From
1976, when I received my Counselors License, until 2000, when I retired from
the agent ranks, I faced this very dilemma. My solution was to never act in
both capacities simultaneously. Even with that caveat in place, it was still
a challenging practice.

Rather than taking the short view of what master I was serving (insurer,
fellow agent, or client) I sought to serve myself by building my professional
reputation first and foremost. This did not come easily at times. To answer
your questions, I provide the following responses.

Can an agent profess to both give consultative advice and represent
the insurer? Absolutely! The "consultative" agent recognizes the need and
has the ability to act in this capacity. As an ex-independent agent I was
under contract to the insurer, not owned by them.

Will an agent or broker recommend self-insurance even in the face of
lost commissions? He will if he is smart, because the best long-term relationships
are not built on commissions but on doing what is best for the client. I
remember when I moved a municipality from a combined GL/WC Retro D plan
to a large deductible GL and self-insured WC program. The soon to be ex-insurer
threatened to sue me for violating our contract as well as the surplus lines
placement laws of our state. I welcomed him to do so and began to move the
balance of my book with that insurer, which 10 years later went into receivership,
never to recover.

Must not-so-complimentary information learned in performing a risk control
study be reported to the underwriter, possibly to the detriment of the client?
Yes, if you are in the capacity of the agent. No if you are in the capacity
of a consultant. In the cases where I was the consultant, I gave the client
the option of having me forward the information or my resigning from the
project.

Can an agent objectively help an insured choose between competing proposals
from other agents, even if that agent has not submitted a bid? The agent
can act objectively but likely will be viewed by both the other competing
agents and insurers as biased. This is a no-win proposition and points to
why the agent cannot act in both capacities simultaneously. Remember, it
is not whether you can avoid a conflict of interest that counts. It is others
perceptions of the conflict of interest that can taint you and your advice.

When/should you bring in an independent consultant? When his credibility
is challenged, his ability is exceeded, or his professionalism jeopardized.

I have been providing risk management and insurance adviser services to my
clients for years. Construction clients require these services, and every one
of our clients receives a written service agreement immediately after renewal.
We provide a complete value-added service package that includes such things
as an annual review of workers compensation experience rating modification,
loss control and risk transfer strategies, claims management procedures, and
we review all contracts that our clients enter into, and offer advice on insurance
provisions. All of our clients appreciate these services and reward us for receiving
these value-added services by referring us to new prospects. As a result of
performing these services, all of our new business comes from referrals.

—Paul Coffey, E.J Wells Insurance Agency, Westford MA

I think a consultant will get his or her fee without "trying" to sell. I
have always taken the approach of a consultant over a salesman. The commission
has always followed to form.

—John Hislop, Producer, SIA, Group Jacksonville, NC

While I have only been in the commercial insurance business for 5 years,
I have been in sales for the past 20 . My father owned a real estate company,
and many times I saw him pass up an opportunity that would have compromised
his ethical duty to a lender, a fellow agent, or to a seller.

In every instance in which I have had to make a judgment call, I have always
taken the long-term view and let the circumstances play themselves out. It has
not always resulted in my making the sale, however, it has resulted in increased
respect and credibility. Sometimes, I have earned referral business from a prospect
to whom I did NOT sell something. My customers and prospects understand that
any recommendations I make are with their best interests in mind. Any coverage
issues are fully discussed, including the results of acting or not acting on
my recommendations.

I consider myself to be a professional and above all else, I strive to be
regarded in that light by my customers, prospects, peers, and associates. However,
what matters most to me is I can look myself in the mirror at the end of the
day, knowing that I did the right thing for the right reason.

—Melinda Holley, Producer, Guaranty Insurance Services,
Austin, TX

I agree with your statement "professional agents try very hard to provide
their clients with the best possible advice....". But what about those exposures
that may be retained or transferred by means other than insurance? I've found
most insurance agents typically focus their attention on risks that are handled
through traditional insurance products. This is where the agent's training and
expertise reside.

However, these risks represent only a portion of the true risk an entity
is exposed to. For example, take a look at credit risk, or risks arising from
contractual obligations. These risks are typically not insured, and therefore
tend to be ignored by the agent. But many times these risks can result in huge
losses, especially if not handled properly.

If an insurance agent holds himself out to be a "risk consultant," then shouldn't
he also have expertise in those areas where traditional insurance products are
not an option? Also, could the agent be held liable for not recommending a strategy
to deal with these types of losses? I think the agent who holds himself out
to be a "risk consultant" is assuming additional responsibility (and perhaps
liability). To me, the title "risk consultant" implies a greater commitment
on the part of the agent to review the organization's entire risk environment,
even beyond those exposures that can be handled through traditional insurance
products.

The "conflict of interest" question further complicates this issue. Typically,
the agent's only compensation is derived from the sale of an insurance product.
Insurance is not the only method of handling some exposures, and in some cases,
is not even an option. It's human nature for the agent to focus his attention
on those exposures that can handled through insurance products, thereby generating
income for his work. I feel a risk consultant, who is compensated on a fee basis,
is freed from the predisposition of selecting any one alternative.

The questions you pose in your eNewsletter are not new, as you know. They've
been asked from the time of the formation or creation of the very first independent,
fee-based, insurance or risk management consultant to the present day. There
is no single answer to most of the questions.

Clearly an independent consultant should be brought in (if at all) during
the broker selection process. Just as clearly, one might expect to obtain better
and less biased specifications if an independent consultant rather than an insurance
licensee were used in the RFP process. This is particularly so if the licensee
creating the specifications will also be responding to the RFP. If any outside
assistance is required in evaluating proposals submitted in response to an RFP,
it stands to reason that such outside assistance is the proper purview of an
independent consultant.

Do agents and brokers provide good, sound, well-balanced and unbiased advice?
In general, of course they do. That said, it is still probably the better course
to use an independent, fee-based consultant in competitive bidding situations
OR in instances where the agent or broker serving the insured requires outside
technical assistance or information.

—Richard D. Gund, J.D., CPCU

Agents or brokers can provide unbiased service, if they are reputable and
have a separate consulting arm. The typical agent/broker is not a loss control
specialist, not a bonding expert, and not a claims expert. They need to stick
where they have their expertise, whether it be personal lines, GL, etc., to
give advice. I ran a risk management consulting arm (fee for service basis)
of a large regional broker for a number of years, and when the "agents" (salespersons)
got involved in "consulting," E&O claims resulted.

Boy do I have an opinion! Can agents and brokers provide credible and unbiased
consultative advise? You bet, but it depends on the agency or brokerage firm
and that individual's ability.

A good agent is a risk manager. Their ultimate goal should be to protect
the "assets" of the company, not sell a policy. If any salesperson is looking
for short-term financial self-interest, then they will not obtain long-term
clients.

I have often found that competition with other brokers becomes a non-issue
when I perform my risk management duties for a client. I become a part of my
client's team and bring more to the table than the preconceived notion of an
insurance salesperson.

If competition is necessary, then an unbiased review of quotes can be done
in a professional manner. Each day an agent faces that review of their own internal
work product, when obtaining multiple quotes from various insurers!

It is a constant commitment to holding your clients' interests above your
personal gain. This is the basis of true integrity and the rewards of providing
this service will be more fulfilling than a commission check.

Obviously, some agents/brokers can and do give their customers sound advice,
even if it means less immediate revenue. They do understand the essential value
in establishing and maintaining credibility, and that always means placing the
client's needs and interests first.

Agents that give reliable advice often find it ignored. Providing sound advice
is crucial to establishing client loyalty. However, in and of itself, sound
advice does not establish a consultative relationship. The fundamental issue
is perception. The client must perceive that the sound advice comes from one
who they trust and respect. I submit that once these values are established,
there is a significantly greater likelihood that sound advice being accepted.

Most buyers understand that agents/brokers are the paid sales force for insurance
companies, so there is an immediate barrier that must be negotiated before consultative
trust is established. Consultants don't have this problem unless they confuse
their mission by also selling insurance, accepting compensation from agents/brokers,
and using self-serving relationships, etc.

Most agents/brokers act like sales people and thus maintain and reinforce
the natural barrier. Why? Because the executive focus/emphasis in most agencies/brokerages
creates and drives the sales-oriented culture. As an agent and broker, we did
not have client retention or client service meetings. Every one was focused
on sales performance. Rewards are for sales performance, not customer satisfaction
or relationship-building. There is a greater emphasis on sales now more than
ever. Of course there are exceptions.

Agents/brokers are also hindered by their own providers, the insurance companies
they represent. Slow decisions, poor claim service, day-before-renewal quotes,
severe changes in terms and conditions, and similar problems only create doubt
in the buyer's mind. As an agent, my biggest problems with a client seemed the
result of an insurer's actions or failure to act, and when that happens, the
agent loses credibility.

Change the culture and change the relationship.

—Craig Thummel

When a client contacts his agent to purchase insurance, he automatically
expects that he will be given the advice he needs to make a proper decision
about what coverages he needs. The agent should ask his clients questions about
the client's operation to better understand what exposures are present and advise
accordingly. He should also be aware of his client's budget and give him some
alternatives in coverages, deductibles, etc., with the effects on the premium.
In most states, during the licensing process and training, proper advisement
of clients and professional ethics are emphasized. If you are an agent of the
insured, I believe it is your obligation.

We advertise ourselves as a "consulting broker" or as "your insurance adviser"
in that we offer our clients risk management advice as well as insurance products
and services. However, an independent consultant should be utilized if the client
is distributing an RFP to various brokers with a truly objective purpose or
if an alternative (i.e. self-insurance) appears to be a viable alternative that
should be properly evaluated.

No one reading this has any interest in option one. If option two occurs,
you have advised the insured your services are no longer required. Option three
is the only route, and even if it is financially painful, it will only be for
a short time, but holds strong promise that your professionalism will get that
back severalfold in other opportunities.

—Frank G. Mikan, President, The HDH Group, Inc., Pittsburgh,
PA

Over the years, I have worked as a risk manager, a broker, and with insurance
companies. I have debated this same topic with other brokers and agents, they
don't like my opinion, which is that brokers and agents may posses the knowledge,
but by their very nature they are prejudiced.

—Rick Jones, CNA, National

As mid-market brokers, our essential function is to serve as our client's
trusted adviser and risk manager, and so a consultant typically is redundant.
However, another set of eyes with a fresh perspective sometimes can add value.
Indeed, we have consulting clients whose broker is someone else, typically an
alphabet house; this occurs with clients for whom we have special expertise
of particular value but where the client wants to preserve an existing relationship
or marketing capability. That said, our experience with independent consultants
generally has been disappointing. While there are some "real pros" who are a
delight to work with, many are of dubious technical competency and even lower
ethics. Although not directly writing insurance, some take fees or share commissions
with brokers to whom they manage to steer business. Others are so focused on
cost reduction, even to the extreme of charging a percentage, that service,
financial stability, and coverage terms and conditions are relegated to the
background.

On the other hand, we willingly bring in consultants to assist us in areas
where we lack specialized technical expertise. Doing what's best for the client
is always right.

I could not agree more! If our industry is to change the perception that
many business owners have about us, we must bring risk management expertise
to them. Too often we are seen as simply selling a product with some good service
instead of providing business solutions that extend far beyond insurance and
may even eliminate some insurance. Insurance is just one of many issues the
business owner has to sort through, and many times it's not even that big of
a piece of his total costs. Approaching the relationship with the mindset of
serving as a consultant will go a long way toward building trust and credibility.
Our industry would be better off if we would bring to our clients a team of
professionals available to provide expert service and solutions to both insurance
and other business "pains." Identify the pain and provide the relief!

Actually, in situations in which I act as a consultant, I do not offer brokering
services. While everyone's opinion is colored by experience and point of view,
I prefer to reduce that bias as much as possible.

But concerning your statement about representing the insurer: brokers (as
opposed to agents), both by law and by custom, represent the insured, not the
insurer. Even though brokers may have agency agreements with insurers, courts
consider brokers to be aligned with the customers.

Insurance brokers are faced with issues every day. As insurance gets more
complex and business issues change daily, brokers are called on to place more
and different coverage. No one (not even me) knows everything about everything.
We need to reach out to real experts, at the client, in our company, and outside,
and admit that we don't have all the answers.

For years, I practiced law at one of the largest, most prestigious firms
in the world, but I have no illusions that I am as authority on every subject.
The "value added" by thoughtful, well-informed brokers is not confined to markets
and pricing. It also includes knowing when to ask questions and when to ask
for help.

Obviously, this reflects my personal opinion and not necessarily that of
my company.

My experience is that a professional agent/broker is just that! I have been
at both ends of this activity even when the current agent/broker or consultant
was a friend. In each case, the total effort was in making sure that the policies
in force did what the insured thought they did, and what could be done to cover
exposures that where omitted. In my 40 years as agent/broker the insured's interest
has always come first. This is not only good business, it is the only proper
way to get the job done for the client as well as the company(s) involved. The
sad comment is that the same client who would not allow time for my review on
his coverages and explanations of limitations and exclusions and conditions,
would pay someone else to do what he wouldn't give me time to do for free. When
I have been the consultant, I have always kept this in mind so that I was dealing
fairly. I have also consistently refused to take over an account on which I
consulted. My theory has always been "If you don't want to do it right, go do
something else"!

—Paul Dobinsky

I would state that any professional agent or broker always places the client's
interest first, or they can expect to loose that client. We do owe certain duties
to our companies, but that does not conflict with our client's best interest.
We have clients that we have advised and/or insured for over 20 years without
regard to our commissions or income. We value the long-term relationship. We
have suggested clients take other agents' products at times, but we keep the
relationship active and when situations change, we get the clients' business
back. When a buyer picks a good professional agent, they should not need to
pay extra for a consultant. How many clients seek two attorneys or two accountants?
They usually don't. Professional Independent Insurance Agents are the best deal
going.

My view is that competition provides the ethics. With a small account, the
producer's compensation plays a bigger role. In the '50s and '60s, when 40%
or more on Homeowners was around, the insured came last. I know, for I was in
the field as a special agent selling Homeowners to producers for INA at 20%
plus a contingent. The father of the Homeowners led the way to reduction in
commissions to a reasonable level.

Today, the pressure for disclosure has helped provide the ethics on the jumbo
business. In the middle and small markets, the commissions are so low that thorough
risk analysis can be a loss for producers. Personal lines is now a commodity,
even though it should not be thus. In the '50s and '60s, Betterly made my life
tough in Massachusetts, for, when he was in an account, the producers had to
work. And, I had to help the INA producer.

Yes, the consultant plays a role in keeping the producers on track. However,
the competition for the jumbo account should work in the insured's favor. The
consultant can surely play a role in the development of specs. The bottom line
is that business decisions are made based on all the factors present.

—Frank Cooke, Retired, Insurance School of Chicago

As a CPA in the captive insurance unit of a major brokerage house this issue
hits very close to home. I agree with the notion that good consultative advice
is simply good business judgment in the long run, and that most brokers I work
with are well-meaning consultants...

However, my observations of clients and prospective clients' is that behavior
toward the broker, generally, carries a high level of professional skepticism
(e.g., they are just trying to sell the flavor of the day).

How does a broker get around this? A good broker will find the common ground
with the client through mutual relationships. For example, our practice works
with most of the big five firms, if we have worked with a trusted adviser of
the client that mutual trust can shift to your favor and establish credibility
very quickly.

An agent can do the same thing through mutual underwriter, claims handling
or other relationships that have proven trustworthy.

—James Girardin, CPA, Vice President, Willis Management
(VT), Ltd.

My first thought when I read this question was that in everyday life, we
receive recommendations constantly from people who also would sell us their
product. Automobile repairs and doctor's advice come to mind. Do we hire a separate
consultant for those? Most of the time, no. We may get a second quote (opinion).
If not pleased, we always have the choice of spending our money somewhere else
for such services. There's where the ultimate power lies. And that's what a
respected agent would keep in mind. It's a matter of building trust. And I would
have to ask myself as a consumer, if I do not trust my agent, why I'm I doing
business with (giving money to) him/her?

Maybe I am a little different, I don't know, but almost all of my clients,
especially larger accounts and those with special needs are not only clients,
but become friends as well. It is important to me to establish a trusting relationship
with each client at the forefront. I am not an agent who likes to look like
the "hero" after the proposal by coming in and "rescuing" my client with lower
premiums that I already knew I could get from the insurer. And I would not sell
my client on a coverage unless I truly felt that it was a necessity to their
scope of operations. To me, this proves that you did not act in the best interest
of the client in the first place. Albeit, there will always be times when a
little friendly competition can force your insurer down some in price—even when
you thought that you had bartered the final dime.

Reduction in price affects all our pocketbooks in the end, but wouldn't you
rather make a little less and keep a long-term client than make a little more
(or maybe none at all) and lose them in the end??? This is not even a question
that I need to ask myself. So yes, agents can and do provide credible and unbiased
service. I am proud to say that I do it all the time!

Concerning your memo in IRMI Update concerning insurance brokers versus consultants,
I was intrigued by your question, "Can agents and brokers provide credible and
unbiased consultative advice?" I have a rhetorical question—"If you DON'T trust
your agent or broker, why are you doing business with them?"

I have never understood some companies putting their insurance "out to bid"
among several agents every year. This practice only told me that the client
didn't understand the broker/client relationship, and I probably didn't want
to waste my time with them. Any one agent can put the program out-to-bid to
insurance companies, if/when that is necessary.

If I didn't feel that I could trust my insurance agent to do the right thing
by my organization, then he would be fired. There is no substitute for your
own education, and your own diligence in keeping up, but you have to trust your
agent.

—Blair Basham, Director of Risk & Insurance, USFWW, Itasca,
IL

The answer is a clear and unbiased "yes" and "no!" It all depends on the
individual supplying the actual service and the business agenda of the organization
for whom the individual works. If the world were ideal, you would have individuals
working for organizations that shared a common philosophy, goals, and objectives.
These philosophies, goals, and objectives would be tattooed on some clearly
visible part of an agent or broker. Better yet, an imbedded chip would allow
you to download the information to your desktop or laptop where you could examine
it without the interference of the sales process.

Unfortunately, we live in the real world of hidden agendas, tactics aimed
at achieving business goals, and organizational goals being met through achievement
of objectives. The unbiased consultant is a rare commodity. The consultant sells
services (notice the plural). They thrive on building continuing relationships.
Some of their advice is self-serving. The unbiased agent or broker is a rare
commodity. They thrive on building continuing relationships and selling products.
Some of their advice is self-serving.

On the flipside, consultants, brokers, and agents bring you new ideas, concepts
that others are effectively using, and advice about the strengths and shortcomings
of your risk management program. Consultants, brokers, and agents are an important
component part of anyone's risk management program. But like everything else
in life, you have to kiss a few toads to find a prince, and sometimes your prince
turns back into a toad.

—Dan Sielicki, Risk Manager, generalRoofing, Fort Lauderdale,
FL

Yes, in my view, as well as experience, an agent or broker indeed can provide
unbiased, consultative advice—as all of them should.

—Adam Stohlman, Risk Manager, B&B Manufacturing, Inc.,
Milwaukee, WI

Your question reminds me of the movie "Miracle on 34th Street" where the
Santa Claus Character sent Macy's customers to Gimbels because Macy's didn't
carry the toy. The Macy's customer loyalty went through the roof! I am not an
insurance agent but I have served as a risk manager for a few years, and I always
trusted our agent to answer my questions honestly and to provide us with the
best solutions, including annual reviews of our business that explored self-insuring
as well as alternative risk protection products that were not in his inventory.
He helped us reduce our workers comp and P/C premiums which in effect lowered
his commissions but his payback was our loyalty for 25 years until the company
sold and of course we were one of his biggest salesmen as we constantly referred
him to potential new clients.

—David J. Schmerer, Training Coordinator, JEA, Jacksonville,
FL

We have been using a broker for many years now, and his service as a broker
and consultant is exceptional. How do we know his advice is credible and unbiased?
We ask a lot of questions and have tailored our own insurance and risk department
to do a dynamic array of research and administrative work.

I'm somewhat ambivalent on whether agents and brokers add value and can or
should act in a consultative capacity on the same account where they place the
insurance. In one respect, they know or should know the account's "ins and outs".
Yet, if a commission dollar is not to be earned, what is their incentive to
discuss alternatives, especially if the alternative would not provide continuing
income to them?

I spent 27 years of my life on the agent/broker/company side of our industry.
I am now on the "buyer" side. I've been involved in some meetings in which I
didn't appreciate a discussion that the agent and the company were having about
my account in which I was totally left out. I don't think that's very professional—on
either side.

My company prefers to go direct to the underwriter whenever possible. My
boss feels that messages don't get distorted, and there is no one better to
explain our business—including our exposures—than we are. Then, the underwriter
can make his or her own decision, with a complete story.

So, I guess I haven't answered the question, but it's my view.

—Becky Walker, Risk Manager, D.E. Harvey Builders, Inc.,
Houston, TX

Notwithstanding their professional ability to do so, to suggest that an agent
or broker (Broker) can offer unbiased advice to a client might be pushing reality
a bit. From the point of view of a Broker, while loss of income is of course
a factor in a "for profit" operation, I believe any advice other than "full
value, first dollar" (with reasonable deductible) coverage is risking an errors
and omissions suit.

A Broker is not usually privy to sufficient information relative to all forms
of risk and or corporate philosophy required to provide advice that would allow
a corporation to accurately gauge the amount of risk it retains.

I also believe it is the primary function of a Broker to procure "quality"
insurance at the best price available. A Broker concentrating on this function
offers the most valuable service to their clientele.

A Broker offering advice on a fee or commission basis relating to self-insurance
in whatever form would be best advised to increase their errors and omissions
limits.

—W.B. Terry, Group Risk Manager, Jardine Matheson Limited,
Hong Kong

My experience is that an agent acts generally only for his principal and
therefore is biased and offers the limited range of services of his employer.
However, a broker could offer more services if he is remunerated on a fee basis
and not on commission. I also like the idea of retaining direct insurers in
our programs. As a risk manager, my only interest is to serve my corporation
well.

In my view, the main problem is that we do need more professional education
on various topics, like advanced risk management lectures. We should stay away
from the traditional concept of purchasing insurance products. We should look
for new approaches to mix some risks and reduce the costs of total risk coverages.
It is sad that insurers do not offer more university courses instead of social
activities to their clients. Why don't Marsh and Aon get together with some
AAA insurers to offer virtual classes for their international clients, not only
with a U.S. perspective, like MBA seminars. This is a personal opinion: we need
more discussion with European scholars on how to minimize our global risks.

Maybe some risk managers are just not interested in increasing their knowledge.
Maybe a code of ethics and a university degree as minimum education could improve
the image of the risk management community. At any rate, I am in favor of a
multi-disciplinary approach with a team of experts in different fields to analyze
some risks. I am not interested in golf with any supplier.

In conclusion, yes it is possible for some real professionals to be impartial
.I try to always keep a good record of the persons who have only a short view.
Today, with some benchmarking, if I find out that I was unfairly treated, I
change suppliers for a more competitive provider. My loyalty is to my employer.
Furthermore, I make the point of meeting once a year with all the insurers,
with or without the broker. The broker is there to represent my interests, not
the insurer's, in an ideal world. That is why I want full disclosure of all
direct and indirect remuneration to the broker.

Of course, I could be wrong, and I will be glad to read different opinions
because all experience is relative.

My opinion to your question is both yes and no (yes I'm thinking about politics).
In my 20 years as a risk manager, I have dealt with brokers and agents who I
felt would give me absolutely honest advice even if it met losing a sale or
commission. These are the people that felt credibility was the most important
thing in their success and I agree.

I also have met agents and brokers that I would not trust to give me honest
advice. They clearly wanted to sell me their product as a good solution to my
issue, even though their solution may not have been the best, most effective,
or financially prudent. The management in my company is always a little suspicious
of recommendations made by salespeople who just happen to have the answer to
an issue, whereas independent consultants are given more credibility.

We use a fee-basis compensation for our broker to give them the credibility
with management as opposed to a commission if we buy a product. I do this even
though I have no doubt my existing broker would give me sound advice even if
it meant we didn't buy a policy or increase limits. In summary, I don't think
there is a single answer—it goes to the integrity of the people (not the company)
that you are dealing with. Therefore, let the buyer beware!

I believe that there is an inherent conflict of interest when dealing with
the question of buying certain coverage's. Can a broker really advise against
buying a coverage that will generate substantial premium especially in today's
environment when return on investment is the yardstick for the major brokers?
The independent consultant will at least have the credibility of being objective
without gaining from the client's action.

In our Engineering & Construction business we see the conflict of interest
where our broker is advising both our client and our firm in structuring the
insurance requirements for a large project. How can the same broker, even using
two different offices, serve both interests equally? Take the question of recommending
an OCIP to a client who has never executed a major, complicated, billion-dollar
project. The client has picked a large E&C company because we have the expertise
to execute a large lump-sum turnkey project but he is told by his broker that
he should take care of the insurance. Could the reason be that this advice generates
a lot of premium even though a CCIP would make more sense given the expertise
of the parties and the nature of the project?

I have more respect and am more likely to use the services again of a broker
who demonstrates a commitment to looking out for my best interest. But the question
I am wrestling with now is, how ethical is it for me to use brokers as consultants?
Here's the situation. I need to have a feasibility study done for a rolling
OCIP. I don't have the resources myself to do it. I could hire a consultant
to conduct the study. But another option is to conduct an RFP or an RFQ for
brokers to submit a wrap-up proposal. Essential to the proposal would be for
them to include the feasibility aspect.

Of course, I feel I need to question the objectivity of the feasibility recommendation
if it favors utilizing their services, but if the broker is truly customer-service
oriented as your article eludes, they could be providing me a valuable service
for free—and that's a little unsettling. Am I being overly conscientious?

Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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